A new report paints a lurid picture of two centuries of bad behaviour in the world of finance.

New research released by the FMSB suggests that the financial world appears doomed to repeat the same breaches over and over again. Following on from other reports into the history of financial fraud this latest research proves that times may change, technologies evolve, but bad behaviour remains the same. So, can this research help us change things for the better?

Learning from history

The FMSB was set up in the wake of the Libor scandal to shed light on ways in which conduct within the financial sector could be improved. This landmark study was an attempt to look at the root causes of financial misconduct and identify ways it could be avoided in the future.

The study spanned 26 countries over the course of a couple of centuries taking in more than 300 different cases of misconduct. Its most eye-catching finding is that, while each enforcement case has its own characteristics, there were a number of findings which crop up time and time again.

It carries on from the findings of the Fair and Effective Markets Review (2015) – in particular, those which address the root causes of misconduct. According to the review, it is possible to identify a few common causes time and time again.

The FEMR stated: “One of the Review’s most striking findings has been that, although the specific aspects of individual misconduct may have varied substantially across traders, firms and markets, the underlying behaviours were remarkably similar in many cases and relatively straightforward to describe.”

A year ago, the FMSB identified 26 common fraudulent behaviours taken across more than 400 cases over a period of 200 years.

To illustrate their point, the authors identified several stories. Back in 1811, with the Napoleonic wars at their height, two enterprising fraudsters, Charles de Berenger and Thomas Cochrane spotted an opportunity for a little pump and dump. They bought a position in UK gilts and then then Berenger turned up at Dover disguised as a French Bourbon officer spreading rumours of Napoleon’s death. He also sent a semaphore message to the British government in the hope that the media would pick up on the story and even arranged a parade through London Bridge. The scheme worked well. British gilts surged and they sold their position at a handsome profit.

Nearly 200 years later, the US Securities and Change Fee alleged fake news from a dodgy Twitter account had been used to spread false and unfavourable information about a know-how firm, Viewers, and a biotech firm called Sarapta Therapeutics.

Both are examples of spoofing – one of the 26 common behaviours in which fraudsters trick the market into thinking there is more demand for a security than there is. Others include rumours which use fake news to spread news which can increase or reduce demand for a certain asset, or washing, in which assets are bought and sold at the same time to launder the money. The lessons are clear: times may change, technologies may evolve, but behaviours stay the same.

Lessons from the market

The report is certainly extensive and is comes at a useful time as regulators attempt to improve conduct and adopt a new, more proactive, approach to regulatory supervision. The findings reflect what we’ve also noticed here at Enforcd. We identified these issues a couple of years ago through our regulatory database. This system collates an enormous number of enforcement cases, which allows us to identify some of the common themes. Our findings were the same as the FMSB – that cases may be different, and circumstances may change, but the causes remain the same stretching across all sorts of different cases and asset classes. The hope is that with this study there’s a chance to gather together the lessons from the past to improve the future as Mark Carney, Governor of the Bank of England agreed.

Speaking about the study, he said it was “fundamental to identifying the root causes of misconduct and to finding ways to reinforce the collective memory of the market about what constitutes acceptable conduct and practice”.

It also fits in with the FCA’s own goals of developing a more proactive approach based on prevention and identifying problematic behaviours before a breach occurs. It represents a move away from the reactive mode of regulation in which enforcement follows breach, to one which addresses troublesome behaviours directly. Commenting on the report they stated that it was helpful in their ongoing attempts to improve conduct.

What’s to be done?

In many ways this report reveals details we already know – or at least think we know. For all the attempts to crack down on misconduct and improve culture within the financial services, breaches continue.

The FMSB, for its part, has called for a “new and additional approach to the conduct problem.” Despite existing rules and regulations, it says, “misconduct has not only continued, but the same patterns of behaviour have repeated and developed.”

Understanding the behaviours that lead to breaches and the warning signs could be a way to help companies develop guidance and practices that identify problems at an early stage, rewards good behaviour and establishes a positive culture within the organisation.

New technologies will prove to be both a help and hindrance. On the one hand they increase transparency, traceability and auditability, but they also create new opportunities for criminals. For example, the use of online trading accounts could see criminals logging into accounts and stealing money or information.

All this new technology will create challenges, but as this report and the experience of our regulatory database illustrate, bad behaviours remain the same regardless of the time, place or technology being used. What this does do is provide more ammunition for regulators as they seek to identify the root causes of breaches and improve conduct in the financial sector.